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Terms of Trade Disturbances, Real Exchange Rates, and Welfare: The Role of Capital Controls and Labor Market Distortions

Sebastian Edwards () and Jonathan Ostry ()

Oxford Economic Papers, 1992, vol. 44, issue 1, 20-34

Abstract: Many arguments in favor of maintaining capital controls within the European Community have not paid sufficient attention to the welfare consequences of this type of intervention. The authors' paper provides a simple choice-theoretic framework in which the welfare effects of capital controls can be assessed. First, they compare the welfare effects of terms of trade shocks in economies with and without capital controls. Second, the authors inquire into the nature of second best arguments for maintaining capital controls, given that other distortions (notably in the labor market) will remain after the European single market is in place in 1992. Copyright 1992 by Royal Economic Society.

Date: 1992
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Working Paper: Terms of Trade Disturbances, Real Exchange Rates and Welfare: The Role of Capital Controls and Labor Market Distortions (1989) Downloads
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